Estimating the National Income of India: Difficulties and Suggestions

Let us make an in-depth study of Estimating the National Income of India:- 1. Difficulties 2. Suggestions to Improve it.

Estimating the National Income # Difficulties:

1. General:

These are largely conceptual limitations:

(i) There is the limitation of including certain services in national income. These are, for example, services of housewife, painting one’s own house, driving one’s own car, etc.

The exclusion of these services makes national income estimates an imperfect measure of economic activity.

The value of such excluded services of course varies from country to country.

In case of housewives for example, in an advanced country, where many women work, the excluded value may not be very large. But in case of an underdeveloped country like India, where for economic and cultural reasons, most women do not work for wages, the excluded value may be substantial, making national income estimates a less reliable index of economic activity.

Again, in the changing situation of economic development more and more unpaid services may become paid services over a period of time, thus making comparisons in real incomes misleading.

(ii) This relates to estimates at constant price. New products which did not exist in the base year cannot be properly evaluated in terms of the base year. This is particularly so in case of a country where during the development phase new goods may appear at a fast rate. And

(iii) Comparison between nations based on national income figures may also be less meaningful because of differences in the purchasing power of money and the packages of goods that can be purchased with a unit of money in different countries.

2. Particular:

Besides the above mentioned general limitations there are others which are particular to India.

Among these are:

(i) Existence of a large non-monetized sector:

Correct estimation of national income is made possible if a substantial part of economic activities is monetized, for this enables the estimator to know the prices and money value of substantial parts of the economic activity.

If money is used to exchange goods and services, the national income estimator needs to impute values to only a small part of national output and that is easily done with the data available for the monetized part.

In India the monetized economy is not large, and as such a sizable part of the output of the economy has to be evaluated by imputing values to it. And in the absence of enough data, imputation is rendered more difficult. Due to barter economy in large sections of Indian people, estimates of India’s national income carry the stamp of guesses and arbitrary imputations.

(ii) Lack of differentiation in economic functions:

In India a substantial number of persons undertake more than one activity during a year. An agriculturist may work as a cultivator at one time, a labourer at another and vendor at still another time of the year. It is difficult to assign any particular profession to him to get estimates of incomes on the basis of industry.

(iii) Gaps in statistical data:

This is perhaps the most important limitation. There is a dearth of requisite statistical material. Unfortunately, statistical material available at present has rarely been collected for the purpose of national income estimation.

The practice has been to somehow adjust the existing material to suit the requirements of estimators. As a result there have been in use many arbitrary assumptions, leading to errors of varying magnitudes.

It may be useful to know some of the major gaps in the statistical material to realise the magnitude of this limitation. In ease of the output method, where data on production, prices and cost of production are essential, the deficiencies are glaring.

In case of agriculture which generates 70 per cent of the income from commodity producing sectors, all the estimates of production are not as yet based on the objective method of crop-cutting experiments.

The output estimates of some of the important crops in most of the States are still based on the traditional method known as “annawari” method. This imparts a subjective element to the estimates. In case of certain crops, statistics are still not collected, particularly for agricultural by-products, for fruits and vegetables grown in courtyards, roadsides, or river banks, and for timber and firewood available in fields, farm-yards, etc. Again, there is no information regarding the unauthorized removal of forest produce and felling of trees outside the regular forests, both of which are likely to be substantial in a poor country like India.

In case of small enterprises and construction sectors, data on output are meager. Besides, output data on prices are also deficient in spite of the enlargement of price coverage in recent years. Price data on certain products like livestock; poultry products and many forest products are still not readily available. Data on costs are also not prepared in many cases, or not properly prepared in case of other agricultural products.

As a result, in certain cases like animal husbandry, forestry and fishery sectors, more or less arbitrary imputation of costs is done. In the cases of many other products, information on costs is culled from surveys which have become outdated and from local enquiries which do not make the data scientific.

In case of the income-method, data on persons engaged in industries and services sectors, and on their earnings are not sufficient. Employment statistics are not available for all industries and services sectors. The major source for calculation of work force has been the various population censuses.

Unfortunately, these censuses are not comparable because of the differences in the “concepts and definitions of economic activities, differences in the. Industrial classifications and the differences in the extent of and form of the calculation of results of the two censuses.”

Besides, a part of information is collected from NSS records, which too are not satisfactory, because estimates of successive rounds are not comparable due to variations in concepts and definitions.

Other data required for this method are net earnings of the persons engaged in the non-commodity sectors; where this method is generally used, per head earning is multiplied with the number of persons engaged. Data for this purpose are drawn from income tax statistics, NSS and local surveys.

Income tax data cover only a very small part of the earners, because many people do not pay, or avoid and evade taxes. Since NSS surveys are undertaken for specific purposes at specified times, these cannot be safely used for getting information on the year-to-year variations in earnings.

For want of complete information on rent and interest, arbitrary adjustments have been made in the CSO estimates of net domestic product.

Similarly, one finds deficiencies in the data about “real estate and ownership of dwellings.” The census data used for this purpose give information at a point of time, and therefore it becomes difficult to know the changes in the number of houses in the inter-census years.

Again rental values of houses are not available on a regular basis, because the rental values are not updated every year by the government authorities. Nor is the basis of rent-fixation uniform throughout the country. Further, estimates of income from residential houses only have been included, leaving out government and other quasi-public buildings, etc.; this turns the revised national income estimates into underestimates.

We can thus say that given the statistical limitations, the inadequacies of statistical materials in the country are quite serious In this context Dr. V.K.R. V. Rao observes that the latest estimates of national income are underestimates and that there is as wide a margin of error as 25 per cent In sum. India’s national income data are far from satisfactory both in respect of coverage and accuracy.

(iv) Deficiencies of estimates of states’ incomes:

The State Statistical Bureaux have prepared estimates for several states.

These estimates suffer from three main limitations:

(i) They are prepared on income originating basis. This means that the net income from the external sector is not included. Now this income is likely to be substantial in the ease of many states. Again, it is difficult to allocate income originating in a state on account of such trans-actors as railways, banks, corporations, Central Government, etc.

The net domestic products of the states, therefore, do not correctly portray the income accruing to the residents of the states; such estimates are generally underestimates. For this reason, state incomes are not comparable with national income because the latter includes net income from abroad;

(ii) The prices in different states being different even for the same goods and services, the state incomes are not strictly comparable. For doing this, suitable adjustments will have to be made; and

(iii) The methods and procedures adopted by State Statistical Bureaux are not uniform. This is largely because of the variation in the deficiencies of statistics in different states. This also makes comparison of state incomes economically meaningless.

Estimating the National Income # Suggestions for Improvement:

In view of the deficiencies in the current procedure of estimation of India’s national income, there is an urgent need for improvement. In this connection two points need to be noted. One, that perfect accuracy in the estimates has not been achieved even in the most advanced countries as it is practically impossible to have the requisite data on each and every economic activity.

All that can be expected of the attempts to improve upon the estimates is to make them more reliable.

Second that a few of the important deficiencies of Indian estimates are associated with the low level of economic development. As the development process proceeds, more reliable data would become available from different sectors. With the emergence of non-agricultural sectors of economic activity and collection of reliable statistics for planning of growth of the country and welfare of the people, there is bound to be improvement.

In the light of these points, one may make the following suggestions:

1. Regular and Continuous Data Collection:

At this stage of India’s development, the most urgent need is to provide adequate number of agencies for data collection and continuous surveys. This will help fill in the gaps in value-added data and at the same time keep data updated on an annual basis. Such agencies should preferably be organized by the Centre.

If these are established by the states, their activities should be supervised by, and coordinated with central agencies. This is to ensure uniformity in the definitions and concepts of various activities in terms of which data are collected. At this time there are certain control agencies like the CSO at the Centre and State Statistical Bureaux in the states. There is a need for better co­ordination among them.

2. Filling the Data Gaps:

In case of certain sectors there is need for and possibility of collecting data afresh. This pertains particularly to production and price information about minor crops, agricultural byproducts, poultry and fishery, etc. Similarly in the spheres of small enterprises, professions, liberal arts, domestic services, self-employed services and house properly, there are many gaps to be filled.

In particular, data on employment in the non-commodity sector need to be organised. There are again gaps in information about cost of production, particularly in agriculture. In this sphere data on cost, e.g., animal feed costs maintenance, repairs and depreciation need to be organised, and existing data updated to reduce to the minimum the element of guess or arbitrary imputations.

3. Data on Consumption:

Consumption is a dominant component of national income which needs to be correctly estimated from the point of view of non-essential consumption, demand elasticities, future demand, etc. Together with data on size- distribution of national income, the national income estimates will be of great use for policies concerning equitable income distribution, savings, etc.

4. At Current Prices and at Constant Prices:

This distinction is important when the purpose is to measure the growth of product over a period of time. In India we have now the ‘old series’ and the ‘revised series’ of national income data. We now measure national income at current prices.

Then the Central Statistical Organisation also estimates it “at 1970-71 prices.” The two series have their own uses. But comparability of the two series has to be ensured through suitable adjustments in the base year and the constituent prices therein.